While acknowledging the potential for work from Cyprus’s gas discovery, the republic’s ties to Greece are a big cause for concern
There are two main issues occupying Cypriot minds right now. One is the economic and political fate of their cultural and political cousins in Greece. The other is the recent discovery of reserves of natural gas off the south coast of Cyprus.
Given the gloom associated with the Greek story it is perhaps understandable that most Cypriots prefer to focus on the good news of the gas discovery.
US company Noble Energy was the first to confirm the gas deposits after exploratory drilling in late 2011. The company was the first to win a licence from the Cypriot government for exploration purposes after the company said it had found between 5tr and 8tr cu ft of gas in ‘block 12’.
The second round of licensing for nine further blocks closed on 11 May, with 15 bids received. Bidders included Total, Petronas, South Korean company Kogas, Eni, Vitol, Israeli company Delek, Australia’s Woodside Energy Holdings and a joint bid by Russian companies Novatek and GPB Global Resources.
The government is expected to take up to six months to confirm the successful bids, but in the meantime members of the island’s business community are happily anticipating the ramifications if more gas is discovered.
“This has attracted more clients, especially from Israel, India and China, and we expect it will drive more clients from gas-producing countries to establish themselves here,” reports Alexandros Economou, a corporate partner at Chrysses Demetriades & Co. “It’s a major thing.”
“There’s a dynamic out of these issues that isn’t just focused on the licensing bids, but also around the periphery,” explains Harris Kyriakides partner Michalis Kyriakides.
He points out that, should Noble’s drilling and the second round of exploration prove successful, there will be a need for a significant amount of related work.
That would include the development of supply chains for drilling platforms and any terminals, plus pipelines or a terminal to process the gas. Naturally, all of this would require legal input.
Time for bid
Most big law firms have had some involvement in the bidding process, which lasted from February to May, although not all firms got an instruction. Elias Neocleous, head of corporate at Andreas Neocleous & Co, says his firm was approached to handle some specific public procurement issues, but has remained fairly detached from the whole gas story to date.
“Our view is that we should keep our feet on the ground and not get overexcited – we should be as pragmatic and realistic as possible,” Neocleous says. “I don’t think any real legal work’s been created. This is still at quite [an early] stage and the real interest on the part of the lawyers will come later.”
Neocleous points out that the size of the companies bidding will likely mean they will turn to international firms with which they have existing relationships for the bulk of any legal advice needed as a result of being awarded licences.
“I don’t think this work will be done by any Cypriot law firm,” he asserts, while acknowledging that local firms will be referred to for purely Cyprus-related law issues.
While Neocleous acknowledges that the gas discovery is still a significant development for Cyprus, pointing to the possibility of the country becoming a Mediterranean energy hub, he stresses that this is a long way off.
“We’re not yet there; it could take time and we shouldn’t take the attitude that a lot of people are taking here, that we’ve got oil, we’ve got gas and we should do energy law,” he argues. “Energy law isn’t rocket science. It’s something that a good lawyer can do anyway.”
Indeed, no local firms are as yet investing heavily in building up their energy law departments, although this is an area several of them are looking at. Cypriot lawyers are conscious of the fact that they do not have a record in energy.
“Perhaps there’s some lack of experience in this sector,” admits Economou. “We’re not only investing in our lawyers to gain experience and eventual expertise, but we’re also looking at other possibilities of bringing in expert lawyers to assist us.”
Kyriakides says there is overlap with some existing practice areas.
“On particular technical issues I’d say that no firm in Cyprus would have the core expertise to deal with that, because it’s never happened in the past,” he says. “But I’d say that firms like ours who have clients like Petrolina in the oil industry are familiar with that sector, and that’s helped us to be more competitive and in a leading position to grasp work.”
Antis Triantafyllides & Sons partner Stelios Triantafyllides agrees that when it comes to energy specifically, Cypriot firms do lack expertise, but he adds that most of the law required to date – and even the law that is anticipated to be needed in the future – will be corporate- or finance-related.
“Energy law hasn’t been particularly relevant – I assume we’ll acquire expertise gradually,” he says.
Lawyers recognise that the gas story is a long-term one. In the shorter term, they, like many other Cypriots, are eyeing the turmoil across the Mediterranean and wondering what will happen to Greece. The historical and political links between Greece and the Republic of Cyprus mean that the countries have close economic ties, and should Greece have to withdraw from the eurozone it is likely to have a significant impact on Cyprus.
“Since we’re connected to Greece we’ve had a lot of problems with the economy,” notes George Georgiou, managing partner at George Z Georgiou & Associates. “The banks have been hit hard.”
“The big worry is what will happen to our banking system if we have a collapse of Greece,” stresses Triantafyllides. “So far nothing’s happened, so we haven’t been affected, but everybody’s concerned.”
Cypriot banks Cyprus Popular Bank and Bank of Cyprus both have heavy exposure to Greek debt, and both reported losses for the 2011 financial year after decades of steady growth. Popular Bank holds Greek bonds worth a nominal €3bn (£2.4bn), but has already written down €2.5bn of Greek debt. The government approved emergency legislation to underwrite a €1.8bn equity issue to prop up Popular on 18 May. Bank of Cyprus, holding almost €1bn in Greek bonds, took a 60 per cent haircut on its holdings earlier this year.
The Cypriot government has already borrowed money from Russia to help with the island’s economy, but may yet be forced to bail out the banks. While the cost of a bailout for a small economy such as Cyprus would not be anywhere near the same as the cost of rescuing Europe’s larger economies, it would nevertheless still be significant.
“This is a big issue hanging over the whole island,” observes Neocleous. “We can’t predict with any certainty. The stalemate in the Greek election’s worsened things.”
The problems in the banking system have had a knock-on effect on liquidity in the Cypriot market. Loans are hard to come by, stifling entrepreneurship and smaller businesses.
Unemployment is also rising, hitting 10 per cent in March, according to EU statistical agency Eurostat – up from 6.9 per cent in March 2011. This puts Cyprus just below the EU average.
Georgiou, whose firm specialises in employment law and is the Cypriot member of labour law alliance Ius Laboris, says his firm’s employment practice has quadrupled in size since last summer.
“Companies that have been in business for 50 years and have never dismissed an employee are seeking employment advice about redundancies,” he reveals, noting a “marked increase” in redundancy and unfair dismissal claims.
Cyprus has a state redundancy fund financed by employers’ contributions, but getting money from it is not automatic and redundant employees who are not granted a share will turn to the courts. Georgiou says firms such as his are spending increasing amounts of time acting for employers, who in turn are trying to force the fund to pay out.
“We have benefitted from the crisis, perhaps more so because we specialise in employment,” adds Georgiou.
The Greek crisis has had a silver lining for firms focusing on corporate work too. Neocleous says Greek businesses have been moving investments, deposits or corporate vehicles to the island.
Meanwhile, the economy continues to be buoyed up by foreign investment, as it has for several years. This is still coming predominantly from Russia, but increasingly from elsewhere. Lawyers report increased interest from China and India in using Cyprus as a funnel for investment, noting that these countries have not been affected by the crisis in the same way as European jurisdictions.
As a result the larger corporate and commercial firms in Cyprus have remained relatively unscathed by the downturn, whereas their smaller, domestic-focused counterparts have reportedly suffered more.
Andreas Neocleous – the island’s largest firm with 130 lawyers – reported a growth in turnover of 5.6 per cent between 2010 and 2011, up to €28.5m. Economou says 2011 at Chrysses Demetriades was “much better” than 2010, while Harris Kyriakides also reported growth for the past year.
Neocleous points to developments in Cypriot law that will encourage the continued use of the island by investors and businesses from overseas, such as the recently amended trusts law. The government has made more than 100 amendments to its
30-year-old legislation, which Neocleous says brings the law into line with EU standards and will enable it to “meet all modern needs”.
“The message is now that Cyprus is in the Premier League of trusts jurisdictions,” he continues, explaining that the changes will make Cyprus more competitive against similar jurisdictions such as Malta and Luxembourg.
The amendments make it easier for trust settlors or beneficiaries to take up residence in Cyprus after the trust is established and makes the trust governed explicitly by Cypriot law. Trusts can also now be set up in perpetuity, as previously international trusts were restricted to 100-year lifespans.
Economou says changes such as the amendments to the trust law are an example of the way the government is attempting to support its vibrant foreign business environment.
“Cyprus is trying to adopt policies that will make it easier for foreigners to invest in the country directly or use the financial services sector in Cyprus,” he says.
A big step forward earlier this year was the ratification of a protocol that amends the 1998 double-taxation treaty between Cyprus and Russia. The Russian State Duma, or parliament, ratified the protocol in February, and all that remains is for it to be signed by the Russian president, which since 7 May has been Vladimir Putin. The protocol is likely to come into force in January 2013.
The protocol amends the treaty, which has been the conduit for significant Russian investment in Cyprus, with the biggest impact being on property holdings and the tax payable on them. Until now capital gains from the sale of shares in a Russian subsidiary by a Cypriot parent company have been tax-exempt in both jurisdictions.
Once the protocol is in force this will no longer be the case if more than 50 per cent of the assets of the subsidiary are in Russian real estate.
The protocol will also remove Cyprus from a Russian ‘blacklist’ of countries supposedly non-compliant with Organisation for Economic Cooperation and Development standards, which meant dividends from Cypriot subsidiaries of Russian companies were not tax-exempt under certain circumstances. Once signed by Putin the protocol should help maintain the relationship between the two countries.
In recent times this has also given rise to litigation involving Russian individuals or companies with a Cypriot element. Cyprus firms have a role to play in the major pieces of litigation involving oligarchs that are ongoing in London, with interim applications brought to the island.
Lawyers hope and expect that this type of work will continue. Neocleous points out that it is important for the country to focus on the assets it has rather than becoming sucked in to global concerns about Greece.
“The very fact that we work with emerging markets that are doing much better than the developed world gives us an asset that can make us successful in this depressed environment,” he concludes.
GDP (2011) e17.8bn
Annual inflation (April 2012): 3.1%
Population (2010): 1.1m
Life expectancy at birth: 79
Unemployment rate(March 2012): 10%
Source: World Bank, Cyprus Statistics Service, Eurostat
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